Minnesota's complex system property tax system filled with numerous variables

ST. PAUL -- Let's say you own a home in Minnesota and the assessor ups its market value. Oh, great, you think: Property taxes will go up. Not necessarily. Or maybe you read that the county board, city council or school board asks for more propert...

ST. PAUL -- Let's say you own a home in Minnesota and the assessor ups its market value. Oh, great, you think: Property taxes will go up.

Not necessarily.

Or maybe you read that the county board, city council or school board asks for more property taxes. You just know it will be a big property tax increase.

Not necessarily.

Perhaps the state Legislature decides local government should pay for something the state used to fund. There's no doubt, you decide, property taxes will soar out of sight.


Again, not necessarily.

In recent years, property taxes for most Minnesota property have gone up. But with what is known as one of the most complex property tax systems in the country, the reasons are complicated and confusing. Dozens of factors affect property taxes.

Many Minnesota legislators and Gov. Tim Pawlenty say they want to provide property tax relief at least to homeowners this year. A $317 million pot of money has been set aside for tax relief, but that would provide only a one-year tax break and it is being threatened by other state needs.

Pawlenty has said in recent days that he would like to put a cap on property taxes, forcing local governments that depend on them to lower budgets or find other ways to fund programs.

Democrats say property taxes have gone up more than $1 billion in three years because Pawlenty and other Republicans have chopped state payments to cities, counties and schools. The governor, on the other hand, said local governments need to learn to live within their means.

Politicians' sound bites make the situation seem simple. Property taxes are anything but simple.

Even so, the property tax system is in use for a reason.

"It is a very stable and secure source of revenue," said Gordon Folkman, director of the Minnesota Revenue Department's Property Tax Division.


Property taxes began in ancient times because it was a fair and easy way to collect taxes.

In Minnesota, the property tax was government's main way of raising money into the 1920s. The Great Depression meant many property owners did not have money to pay taxes that would be needed for the higher demand on state services, forcing the state to begin individual and corporate income tax collections in 1933.

The state depended less and less on property taxes over the years. In 1967, the state turned responsibility for collecting property taxes to counties and the theory of allowing property taxes to fund local government programs began.

Today, counties, cities, schools and a variety of other entities - such as mosquito control districts and watersheds - get most property tax collected in the state. In recent years, the state resumed collecting property tax on cabins and businesses, but for the most part the state does not profit from property taxes.

One complexity is the number of taxing governments - 3,483 (the state, 1,974 townships, 854 cities, 87 counties, 341 school districts and 406 special districts). The overlapping jurisdictions means neighbors with identical houses could pay different taxes if, for instance, a school district boundary goes between their homes.

The property tax story begins with each of those 3,483 jurisdictions. Each governmental body sets its budget and looks at revenue available from the state, fees and elsewhere. Property tax makes up the difference.

At the same time, city and county assessors regularly update the estimated market value of each property.

Minnesota Revenue Commissioner Dan Salomone said the simple explanation of property taxes is spreading out the financial needs of local governments based on property value.


It's not that simple.

For instance, each type of property is taxed at a different rate. Homes are taxed at a lower rate than businesses; in other words for every $1,000 of property value, a homeowner will pay less than a business owner.

Legislators traditionally try to make sure homeowners' property taxes are lower than other forms of property.

"After all, they vote," Salomone said.

Lawmakers do a lot of tinkering to keep taxes fair.

"We tend to micromanage at the legislative level," Folkman said.

Among laws legislators adopted to protect homeowners is one that permits home values to rise no more than 15 percent a year, at least as far as property taxes are concerned. So if a $100,000 home's value increases 20 percent to $120,000, property taxes would be collected only on $115,000.

Some forms of property tax relief are not so visible to the average taxpayer.


In many cases, the state pays money to local governments under the theory that they would not need to raise property taxes as much. The most-discussed example is Local Government Aid, which the state pays cities to keep property taxes down.

The story gets even more complicated.

"There are all these interdependencies," Salomone said.

For instance, most people think that if the value of their homes goes up, taxes always follow suit. Maybe, maybe not.

Look at two homes with increasing value in an area where governments are not seeking more money, one where all home values are rising and another where many values are falling. If all home values rise at the same percentage, each homeowner may end up paying about the same taxes as the year before. However, in the other example, the owner of the home increasing in value would end up paying more because those with falling value would pay less while the government is seeking the same amount of money.

Then there is the case where local governments all want more money from property taxes. If everything else remains equal, property owners would, indeed, pay more taxes. However, if it is an area where lots of new homes are being built, they may pay enough taxes that the existing owners' taxes actually could go down.

In the third example, when local governments want more money, property taxes often will rise. However, the governments may find sources of revenue other than property taxes - such as state or federal grants or raising fees. As in the other examples, it also depends on how hour home's value increase or decrease compares to other properties.

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